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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2002

Commission File Number: 0-26273

PRIMUS KNOWLEDGE SOLUTIONS, INC.

(Exact name of Registrant as specified in its charter)

1601 Fifth Avenue, Suite 1900

Seattle, WA 98101

(Address of principal executive offices, including zip code)

(206) 834-8100

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock $0.025 par value per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the common stock on the last business day of the second fiscal quarter, June 28, 2002, as reported on Nasdaq National Market System was approximately $6.8 million. Shares of common stock held by each executive officer and director and by each person who owned 5% or more of the outstanding common stock as of such date have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s common stock outstanding on March 25, 2003, was 19,053,821.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by a portion of Item 10 and Items 11 and 12 of Part III of this report is incorporated by reference from the registrant’s definitive proxy statement, relating to the Annual Meeting of Shareholders to be held in June 2003, which definitive proxy statement shall be filed not later than 120 days after the end of the fiscal year to which this report relates.

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PRIMUS KNOWLEDGE SOLUTIONS, INC.

FORM 10-K

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“Primus^®,” “Primus^® eServer,” “Primus^® eSupport,” “Primus^® Answer Engine,” “Primus^® iView,” “Primus^® Quick Resolve,” “Primus^® Interchange,” and “Primus^® eSales” are trademarks, registered trademarks, or service marks of Primus. This Annual Report on Form 10-K also contains trademarks and service marks of other companies, which are the property of their respective owners.

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PART I

This Annual Report on Form 10-K (“Form 10-K” or “Report”) contains forward-looking statements. These statements relate to future events, plans or objectives or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the “Risks Associated with our Business and Future Operating Results” contained in Item 1 below. These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our expectations.

ITEM 1.    BUSINESS

Overview

We provide application software that enables companies to improve customer service by accessing, analyzing and improving information. Primus^® software offers a significant measurable value to businesses by providing an application that captures and shares knowledge, increasing the efficiency and effectiveness of customer service. Our software products can be implemented as a suite or as individual products, depending on the customer’s preference and/or business need. Our software is flexible and easily implemented. Our solutions can be used in combination with leading eService and IT Helpdesk applications, including those from Amdocs/Clarify, Kana, Onyx, Oracle, PeopleSoft, Remedy, Siebel and others. Our products are also used in Portal environments in combination with products from BEA and IBM. In addition to software applications, we offer professional services to assist customers with software implementation, integration, hosting, training and support.

We target mid- to large-sized organizations, and our products are used by call centers, IT helpdesks, field service organizations, human resources organizations, marketing organizations, and eService businesses. In addition to our traditional markets of technology and telecommunications, we touch vertical markets that include aerospace, financial services, manufacturing, outsourced services, eCommerce and retail. We develop our products and market and sell our software and services primarily through a direct sales force and a minority owned Japanese entity. We have offices throughout the United States, and in the United Kingdom and France. Our principal executive offices are located at 1601 Fifth Avenue, Suite 1900, Seattle, WA 98101.

We incorporated in Washington State in 1986 and our common shares were originally listed on the Nasdaq National Market^® on June 30, 1999, and were transferred to the Nasdaq Small Cap Market on or about November 1, 2002, and publicly trade under the symbol PKSI.

Available Information

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 as amended (Exchange Act). You can inspect and copy our reports, proxy statements, and other information filed with the SEC at the offices of the SEC’s Public Reference Rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Rooms. The SEC maintains an Internet Web site at <http://www.sec.gov/> where you can obtain most of our SEC filings. In addition, you can inspect our reports, proxy materials and other information at the offices of the Nasdaq Stock Market at 1735 K Street

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NW, Washington D.C. 20006. We also make available free of charge on our website at <www.primus.com> our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. You can also obtain copies of these reports by contacting Investor Relations at investor.relations@primus.com or by phone at 206.834.8100.

Industry Background

The emergence of the Web (Internet and Intranet) as a business medium has made it imperative for companies across a variety of industries to recreate the way they do business. Today, eBusiness initiatives are designed to manage most, if not all, of a customer’s interactions with a company. The fast-growing eService market has focused on enabling companies to market their products, manage the sales process, transact sales, manage customer service, and interact and communicate with customers, partners and suppliers using both traditional and emerging communication channels—including the phone, web, email, chat, and on-line self service. Because of competitive pressures and customer expectations, even the most traditional companies have found it difficult to ignore the need to implement an eService strategy.

The shift from traditional business practices to doing business on emerging communication channels has fundamentally changed the way that companies interact with and think about their customers. Increasingly, companies are realizing that they must personalize each customer experience by providing products and support based on each customer’s needs and that exceed each customer’s expectations. To accomplish these goals, businesses must communicate with customers via the media of the customer’s choice and deliver relevant information to customers. Companies realize that they must learn from each customer interaction, in order to respond to customer inquiries in real-time and provide a consistent level of service 24 hours a day, seven days a week.

There are inherent challenges associated with interacting with customers in this new and dynamic business environment. Customers have higher expectations and experience lower switching costs when a new vendor is “just a click away.” Customers also expect to have the same experience regardless of the communication channel used to interact with a business. Companies must view their customers in an integrated way, providing visibility to each customer’s information across their organizations. Customers are now active, informed participants in the business process and each customer interaction must be maximized to retain and increase sales to existing customers and improve customer satisfaction.

To compete in today’s business environment, companies must maximize their relationships with prospective and existing customers. The need to develop and sell more deeply into their existing customer base has led many companies to implement eService initiatives and software. eService software is designed to enable companies to interact with their customers and manage customer information in a way that helps companies maximize the value of each customer interaction. Facilitating more efficient communications with customers can help to improve the level and quality of customer service companies deliver and, in turn, increase customer satisfaction and retention and cross-sell and up-sell opportunities.

eService vendors offer a variety of solutions, ranging from point solutions that fulfill a specific customer service need, to more comprehensive solutions, which are often built via the extension of a smaller application or acquisition of third-party software. All of these solutions are intended to manage some piece of the customer interaction, and purport to add value to the customer-company relationship. Increasingly, however, companies are looking with a critical eye at customer service applications and are considering which of the myriad solutions available will be most appropriate for their business and operating environments—which will most effectively improve their customer service offerings, integrate into their current and future eService infrastructures, and offer the best potential fiscal results.

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Primus Solutions

We offer complete knowledge solutions that enable companies to deliver great service by accessing, analyzing and improving information. Our products are used by call centers, IT helpdesks, human resources organizations, marketing organizations, and eService businesses.

Our solutions are predicated on the belief that the intellectual capital resident within a company’s workforce and within its’ disparate systems, are its most valuable asset. We provide knowledge-enabling solutions that allow companies to enhance customer relationships by managing and sharing the company’s valuable internal knowledge and expertise with customers, partners and employees, across multiple communication channels and business processes. Our software helps address the unique challenges faced by companies implementing a customer service and support strategy.

Primus software has the following key characteristics:

Intangible asset management.    Our software enables companies to capture, manage, and share a variety of knowledge, including requests for information, service, support, technical information, and institutional knowledge gained from interactions with customers, partners and employees, across a multitude of communication channels—including the Web—so that the entire enterprise can apply this knowledge to future interactions.

Integration.    Our software integrates with leading eService and IT helpdesk implementations, including applications from Amdocs/Clarify, Kana, Onyx, Oracle, Peoplesoft, Remedy, SAP, Siebel and others. Integration with these broad eService applications enables companies to easily capture and access knowledge during the course of the customer interaction. Fast access to current, relevant knowledge is key to achieving the verifiable return on investment (ROI) that buyers demand.

Scalable architecture.    Our solutions scale from small to enterprise usage. Our customers have demonstrated the scalability of our software in demanding, transaction heavy environments. For example, one company experience shows that Primus eSupport is scalable to support several hundred thousand user accesses per month. In addition, companies have purchased our software to be used by thousands of employees, and hundreds of thousands of their customers and partners, on a global basis.

Rapid Return on Investment.    Our software offers a significant, measurable return on investment. For example, a networking software company reported a reduction of service escalations by 20% in six months; a manufacturing company reduced support escalations from level 2 support representatives to level 3 support representatives by 60% in three months. Our solutions can be rapidly implemented and easily customized, thus allowing for minimum downtime before companies experience the benefits of choosing Primus software. In addition, the extensive business functionality provided by our software allows companies to realize more immediate benefits such as reduced support costs, enhanced customer satisfaction, and increased productivity. The extent of return on investment of Primus products is specific to our customer’s experience.

Primus Strategy

Our objective is to establish and maintain a leadership position in providing Web-based problem resolution software applications for the customer call center, customer support center, IT helpdesk, and self-service portal markets. Our strategy to achieve this objective is to:

Drive top-line revenue and corporate profits.    We intend to be the leader in providing software applications for knowledge management and enterprise search, customer call centers, support centers, IT helpdesks, and employee, partner and customer self-service portals. Primus will leverage industry standard Java technologies, and web services, to easily integrate into disparate systems, and provide applications that answer customer questions via web self-service and in assisted service environments.

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Enhance our product suite.    We plan to enhance the capabilities of our product family by developing and licensing additional products and technologies. We intend to focus on applications and technologies that further web-based customer self-service. We develop our products to operate in numerous enterprise environments including Java 2 Platform, Enterprise Edition (J2EE), Microsoft Windows and NT and Sun Solaris Unix.

Target additional vertical markets.    We are focused on targeting additional vertical markets to broaden the reach of our problem-resolution products. Initially, our sales and marketing efforts targeted large enterprises in dynamic, technology-related industries that offer external customer support, such as software, hardware and telecommunications. We are currently focused on broadening our reach across multiple verticals, such as outsourced services providers, manufacturing, aerospace, financial services, pharmaceutical, and government.

Build additional strategic relationships.    We intend to strengthen our market reach by further developing partner relationships with leading implementation consulting, systems integration, and technology vendors. We believe that these strategic relationships will provide us with additional sales opportunities, further leverage our implementation resources, and broaden our current eService integration capabilities. Concurrently, we intend to expand our indirect distribution channels to complement our direct sales force.

Extend our solutions to other functional areas.    We intend to continue to enhance the features of our solutions to provide benefits to functional business areas other than customer support, such as Human Resources, Sales and Marketing. Many of our customers already use Primus applications for self-service and assisted service on their employee portals, partner portals, and for answering RFP’s within their sales organizations. Primus applications are valuable to any organization that needs to help its employees or customers answer questions from disparate data sources and store valuable knowledge for re-use by others within the organization.

Products

Our software can be deployed as a suite, as individual products, or as an integrated solution with other leading eService applications, depending on the customer’s preference and/or the immediacy of their need.

License fees for our software vary with each application, but our products are typically licensed on a per-processor basis, per-user basis or based on the number of user sessions authorized to use our software at any given time. Our typical license agreement provides the licensee a perpetual, nontransferable license to use our software.

The following summarizes the current products that comprise the Primus software suite:

Primus^® Answer Engine

Primus Answer Engine enables companies that want to leverage existing enterprise content, including websites, technical documentation and user manuals, to provide answers to questions from customers, employees, and partners. Users can quickly get relevant answers from more than 225 types of files, including Adobe PDF, Adobe Frame Maker, HTML, Microsoft Word, Microsoft PowerPoint, Microsoft Excel, and more. Primus Answer Engine uses natural language processing (NLP) to analyze the meaning and context of the customer’s question and provides specific answers from enterprise content. Used in conjunction with Primus eServer, customers can accelerate the creation of a knowledge base to more effectively share information across the enterprise. Primus Answer Engine also provides detailed reports to identify frequently requested documents, and information that needs to be updated or created within the organization.

Primus^® eServer

Primus eServer enables organizations to dynamically create, capture, and share knowledge to enhance their customers’ experiences and increase the effectiveness of their businesses. Primus eServer can be used in a variety of business environments, including, but not limited to, customer service and support, field engineering, human resources, and sales and marketing, wherever a company needs to make knowledge available to its employees or customers, particularly when there is a large volume of information relating to products or systems.

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Primus eServer is built on the Primus^® Associative Search Engine, which provides sophisticated search functionality and enables the capture and creation of knowledge during the course of an interaction with a customer. Unlike text search engines that deliver large volumes of sometimes irrelevant answers or case-based systems that—due to their design—may deliver too limited a response, Primus eServer delivers answers that are both useful and manageable. Primus eServer can be used to support all phases of the customer lifecycle, from new requests for information or service, to secondary customer interactions that would benefit from previous knowledge captured in the knowledge base. Further, companies can use this knowledge to proactively serve their customers. For example, knowing that a customer has experienced repetitive customer service issues with a specific product, a company can proactively offer that customer a newly released product that will solve their service issues.

Primus^® eSupport

Primus eSupport enables customer service and support organizations to publish knowledge—real solutions to real problems—for direct customer access via the web, or via a customer, employee, or partner Portal, 24 hours a day, seven days a week. Primus eSupport leverages the Primus Associative Search Engine capabilities of Primus eServer to deliver fast, reliable answers to users and capture information for future use by the company.

Primus^® Quick Resolve

Primus Quick Resolve guides first-level service agents through a rapid problem resolution process. If a solution is currently unavailable, it enables first-level agents to capture the customer’s request and then escalate to second-level agents for resolution or additional solution authoring. Quick Resolve functionality fits between Primus eServer, which includes full authoring capabilities, and eSupport, which provides solution access only. It is integrated with leading Customer Relationship Management and incident or call tracking system applications and offers results with as little as one click.

Primus^® iView

Primus iView is an intuitive and user-friendly interface designed to maximize the full functionality and benefits of our current product line. This interface further reduced workarounds, extended customization options, and refined integrations to accelerate the benefits our customers measure, such as employee productivity and cost savings. Primus iView enhances the best of what we have to offer, utilizing the power of Natural Language Processing, associative searching, dynamic queries, and HTML authoring.

Product license revenue and related service revenue from our Primus eServer and Primus eSupport related products accounted for 90% or more of our total revenue for each of the years ended December 31, 2002, 2001 and 2000, and we expect these products to continue to account for a substantial portion of our revenue for 2003.

Product Architecture

Our products use a multi-tiered architecture to meet the knowledge-enabled needs of businesses. We use industry-standard platforms, components, and communications interfaces to provide knowledge-enabling software that is designed to be reliable, maintainable and scalable, and to provide high performance on a 24-hour basis. Our flexible architecture adapts to a range of needs, from a single desktop to enterprise systems that support thousands of users.

Primus eServer software runs on Microsoft Windows NT, Microsoft Windows 2000 or Sun Solaris UNIX systems in single- or multi-processor configurations. Our client software runs in a fully customizable interface accessed through a web browser. We currently support IBM DB-2, Microsoft SQL Server and Oracle databases.

Primus Answer Engine 3.0 software runs on J2EE and Windows systems in single- or multi-processor configurations. Primus^® Answer Engine complements the keyword search capabilities of these products with its ability to provide direct answers to natural language questions.

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Customer Support and Professional Services

We believe that high-quality customer support and professional services are required for continued growth and increased sales of our products. We have made significant investments in our support and services organization in the past and plan to continue to do so in the future.

Consulting.    Our consulting teams work closely with our customers prior to product implementation to review a customer’s business objectives and information technology infrastructure in order to assist the customer in determining Primus solutions that will best suit the customer’s needs. Thereafter, our consultants may install, integrate and implement our software in the user’s environment.

Training.    We provide training in conjunction with our products, including end-user training and advanced technical training regarding the implementation and administration of our products. Training is offered to customers and third-party partners, such as service providers and systems integrators.

Customer Support.    We recognize the importance of product support and quality service to the success of our customers by offering world wide technical product support to ensure quick response and resolution of their issues. Our customers can contact our support engineers via telephone, fax, and email 7 days a week, 24 hours per day. The use of our eServer product by our support engineers facilitates the quick, accurate resolution of those issues. In addition, thru the implementation and integration of our eSupport and Answer Engine products we allow our customers direct, Web-based access to a robust and collective solution database for their self service needs.

Customers

Initially, our sales efforts targeted large enterprises in dynamic, technology-related industries that offer external customer support. We have broadened our sales focus to include additional vertical markets and enterprises of a wide variety of sizes that need to make knowledge available to their employees or customers, and particularly companies where there is a large volume of information relating to products or systems. In addition to our traditional markets of technology and telecommunications, we touch vertical markets that include aerospace, financial services, manufacturing and retail. During 2002 we continued to grow our Global 2000 Customer base by adding many new customers including Airbus, British Telecom, Commerce One, GE Power Systems, The London Stock Exchange, Marathon Ashland Petroleum, New York Life Insurance, Storage Technology, T-Mobile, West Publishing and others.

Sales and Marketing

We market and sell our products primarily through a direct sales force. Our sales strategy is to pursue targeted accounts through a combination of our direct sales force and strategic relationships with third parties. Our field sales force, which includes both sales representatives and sales engineers, is organized into regional teams, complemented by direct telesales based at our headquarters in Seattle. We have sales offices in the United States, the United Kingdom and France. Our international sales constituted 20%, 23%, and 20% of our 2002, 2001 and 2000 revenue, respectively.

Our marketing department has a three-fold purpose: understanding the evolving needs of the marketplace and providing direction to the product development function, sustaining relationships with existing customers and industry analysts, and managing all outbound communications with the marketplace to create awareness and generate interest in our products and services.

Our software is marketed, distributed and supported in Japan by Primus Knowledge Solutions, K.K. (Primus KK), a joint venture owned by Trans Cosmos, Inc. and us. Our relationship with Primus KK is described in this Item under the subheading “Joint Venture and Subsidiaries.”

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Product Development

Our product development team is responsible for designing, developing and releasing our products. The group is organized into five disciplines: architecture, development, quality assurance, documentation and program management. Members from each of these disciplines, along with a product manager from our marketing department, form separate product teams that work closely with sales, marketing, and professional services members, and with customers and prospects to better understand market needs and requirements.

When required, we also use third-party development firms to expand the capacity and technical expertise of our internal research and development teams and in January of 2003 we engaged an offshore development team to accelerate our development efforts. Additionally, we sometimes license third-party technology that is incorporated into our products. We believe this approach significantly shortens our time to market without compromising our competitive position or product quality. Therefore, we expect to continue to draw on third-party resources in the foreseeable future.

Our development efforts are essential for us to remain competitive. Costs related to research and development are among our single greatest operating expenses. For a complete description of our development-related expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Expenses.”

We have a software development methodology that we believe allows us to deliver products that satisfy real business needs and meet commercial quality expectations. This methodology is based on the following key components:

Our goal is to implement quality assurance processes throughout the software development life cycle. We believe that strong emphasis placed on analysis and design early in the project life cycle reduces the number and costs of defects that may be found in later stages.

Competition

The market for our products is rapidly evolving and increasingly competitive as current competitors expand their product offerings and new companies enter the market. Our suite of products competes against various vendor software tools designed to address a specific element or elements of the complete set of eService processes, including e-mail management, support, knowledge management, and web-based customer self-service and assisted service. We also face competition from in-house designed products and third-party custom development efforts.

In addition, competition may increase as a result of software industry consolidations and formations of alliances among industry participants or with third parties. Some current and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources, and thus may be able to respond more quickly to new or changing opportunities, technologies and customer requirements. Also, many current and potential competitors have wider name recognition and more extensive customer bases. They might be able to undertake more extensive promotional activities, adopt more aggressive pricing strategies, and

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offer purchasers more attractive terms. Some of the companies providing e-commerce, advanced natural language self service and traditional customer relationship management solutions that may compete with us include Amdocs/Clarify, Answerfriend, Ask Jeeves, Autonomy, eGain, Inquira, iPhrase Technologies, Kana, Kanisa, Oracle, Peoplesoft, Right Now Technologies, ServiceWare and Siebel.

The principal competitive factors in our industry include:

As the market for customer service and support and knowledge management software matures, new and larger companies will enter the market, existing competitors will form alliances and current and potential competitors could acquire, be acquired by or establish cooperative relationships with third parties. The resulting organizations could have greater technical, marketing and other resources and improve their products to address the needs of our existing and potential users, thereby increasing their market share. Increased competition could result in pricing pressures, reduced margins or the failure of our products to achieve or maintain market acceptance.

Although we believe that our products and services currently compete favorably with respect to such factors, we cannot provide any assurance that we can maintain our competitive position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical, and other resources.

Proprietary Information

Our success depends in part on our ability to protect our proprietary rights. To protect our proprietary rights, we rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements with consultants, vendors and customers. We pursue the registration of certain of our trademarks and service marks in the United States and in certain other countries, but we have not secured registration of all our marks.

Joint Venture and Subsidiaries

Primus Knowledge Solutions, K.K.

Primus software is marketed, distributed and supported in Japan by Primus Knowledge Solutions, K.K. (“Primus KK”), a joint venture in which we hold a 19.6% minority interest and hold 1 of 6 board of director

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positions. Trans Cosmos, Inc., Japan’s oldest and largest outsourced customer service and information technology support solutions provider, holds the remaining 80.4% of Primus KK. Trans Cosmos currently holds approximately 10% of our common stock. Our distribution arrangements provide Primus KK with exclusive rights to the Japanese and English versions of our Primus^® eServer and Primus^® eSupport products in Japan, and nonexclusive distribution rights for these products in Korea, China and Hong Kong. The distribution arrangement continues until terminated by mutual agreement or, if Primus KK has not completed the listing of its common stock on a recognized public stock exchange by December 31, 2004 or if certain performance goals are not met, its expiration on March 31, 2006. In July 2002 and again in January 2003, we amended the distribution agreement with Primus KK, and they have assumed a more significant role in product localization and support for the Japanese market. We also agreed to a new royalty fee structure with guaranteed minimum payments from Primus KK of $1,000,000 per year, to be measured quarterly per the terms of the agreement. In January 2003, Primus committed to invest one-half of the minimum royalty payments in Japanese product version development and support or Primus KK may withhold the underinvested amount from its guaranteed minimum until such deficit investment is made up. The amended distribution agreement provides for sublicense fees based on a percentage of net fees collected by Primus KK from its customers (subject to certain minimums). The guaranteed minimum payments from Primus KK could result in an adjustment to the sublicense fee due each quarter, but such payments do not constitute an advance inventory purchase nor can such payments be credited or carried over from one year to another. Guaranteed minimum royalty payments, to the extent they exceed sublicense fees due, are recognized in the period earned. Our agreement with Primus KK does not contain product return rights. Revenue recognized under the reseller agreement totals approximately $1,394,000, $3,134,000, and $2,609,000 in 2002, 2001 and 2000, respectively, and revenue deferred at December 31, 2002 and 2001 was approximately $248,000 and $353,000, respectively, and accounts receivable at December 31, 2002 and 2001 were approximately $471,000 and $326,000, respectively. Primus KK is accounted for using the cost method, as management believes it does not have significant influence over its operations, has not guaranteed any of its obligations and does not have any commitment or intent to provide any funding. The carrying value of Primus KK is zero at December 31, 2002 and 2001.

European Subsidiaries

Primus Knowledge Solutions (UK) Limited and Primus Knowledge Solutions France are wholly-owned Primus subsidiaries conducting sales and marketing activities for Primus in Europe. The assets, liabilities and results of operations of these subsidiaries are consolidated into our financial statements.

AnswerLogic, Inc.

AnswerLogic, Inc. is a wholly-owned Primus subsidiary holding the technology assets arising from our subsidiary merger with Answerlogic, Inc. on May 31, 2001. This subsidiary’s assets, liabilities and results of operations are consolidated into our financial statements.

Imparto Software Corporation and 2order.com, Inc.

Imparto Software Corporation and 2order.com, Inc. are two inactive, wholly-owned subsidiaries which resulted from subsidiary mergers prior to 2001. The assets, liabilities and results of operations of these inactive subsidiaries, if any, are consolidated into our financial statements.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide any funding to any such entity. As such, we are not exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

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Employees

As of December 31, 2002, we had 148 employees, including 14 European-based employees. These included 48 in sales and marketing, 33 in client services and support, 47 in research and development and 20 in general and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we believe our relationship with our employees is good. In addition, we occasionally supplement our workforce with consultants.

Competition for qualified personnel in our industry is intense. We believe that our future success will depend in part on our continued ability to hire, train and retain qualified personnel.

Acquisitions, Dispositions and Restructurings

On May 31, 2001, we acquired AnswerLogic, Inc. (AnswerLogic). AnswerLogic’s technology provided us with natural language capabilities that were a logical extension to our product suite. These capabilities allowed our customers to provide direct answers to customer questions from unstructured data sources—HTML, PDF and text formats—as well as structured information contained in the Primus knowledgebase. At the closing of the acquisition, all of the outstanding equity securities and certain outstanding convertible subordinated promissory notes of AnswerLogic were converted into 750,000 shares of Primus common stock, 112,500 shares of which were held in escrow. During the quarter ended September 30, 2002, 75,000 of the 112,500 shares held in escrow were delivered to Mindfabric, Inc. as part of a settlement and release agreement (see Note 10) and the remaining 37,500 shares were cancelled.

The acquisition was accounted for by the purchase method whereby the purchase price of approximately $2.9 million was allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $2.8 million has been recorded as goodwill and was being amortized on a straight-line basis over the estimated useful life of three years. The fair value of the common stock issued in the acquisition was $3.94 per share, based on the average market price for a three-day period before and after May 21, 2001.

During the third quarter of 2001, we discontinued funding product development for 2order, a wholly owned subsidiary. On September 29, 2001, 2order sold substantially all of its assets to its leading reseller. As a result of this transaction, our reseller rights for the eSales product line were cancelled. The gain on the disposal of substantially all of the 2order assets was recorded as an extraordinary gain in our condensed consolidated financial statements for the quarter ended September 30, 2001, since the disposed assets were acquired in an acquisition accounted for using the pooling-of-interests method of accounting and were disposed of within two years of the business combination.

During the fourth quarter of 2001, and again during the first and third quarters of 2002, the Company executed restructuring plans to reduce headcount and infrastructure, and to eliminate excess leased facilities. During 2001, Primus recorded $2,530,000 in restructuring and other related charges. Restructuring charges for the year ended December 31, 2002 totaled $1,227,000.

Included in restructuring and other related charges are excess facilities and asset impairment charges for the years ended December 31, 2002 and 2001 of approximately $636,000 and $1.4 million, respectively, which were the result of our decision to exit certain domestic and international facilities, and were estimated based on our evaluation of then current market conditions relative to our existing excess facilities accrual. The estimated facilities costs are based on current comparable rates for leases and subleases of a comparable term or termination fees, net of estimated sublease income of approximately $52,000. The asset impairment charges are primarily for leasehold improvements, computer equipment and related software, office equipment and furniture and fixtures disposed of or removed from operations as a direct result of the restructuring plans. If estimates and/or assumptions change, the actual loss may differ from the 2002 estimate. Future cash outlays are anticipated through June 2004 unless we are able to negotiate to exit the leases at an earlier date.

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Also included in restructuring and other related charges are employee separation and other costs for the years ended December 31, 2002 and 2001 of approximately $591,000 and $1.1 million, respectively, which included severance, benefits and associated costs related to reductions in our workforce during the fourth quarter of 2001 and the first and third quarters of 2002. During 2001, we reduced our sales and marketing workforce by 29 employees, our research and development workforce by 24 employees, our professional services and support workforce by 14 employees, and our general and administrative workforce by 5 employees for a total workforce reduction of 72 people. In 2002, exclusive of attrition, we reduced our research and development workforce by 18 employees, or 25%, our sales marketing workforce by 9 employees, or 14%, our professional services and support workforce by 4 employees, or 10%, and our general and administrative workforce by 3 employees, or 12%, for a total workforce reduction of 34 people, or 17% of our employee base from January 1, 2002.

As we continue to evaluate our underlying cost structure to improve our operating results and better position ourselves for growth, we may incur further restructuring charges, including severance, benefits and related costs due to a reduction in workforce and/or charges for excess facilities or assets disposed of or removed from operations as a direct result of a reduction in workforce.

Executive Officers of the Registrant

Information required by Item 10 of Form 10-K with respect to executive officers of Primus is set forth below. Our executive officers are appointed by the Board of Directors. There are no family relationships among any our executive officers or directors.

Our executive officers as of March 25, 2003 are as follows:

Michael A. Brochu has served as our President, Chief Executive Officer and Chairman of the Board since November 1997. Mr. Brochu was President and Chief Operating Officer of Sierra On-Line, Inc., an interactive software publisher, from June 1994 until October 1997. Mr. Brochu received his B.B.A. in accounting and finance from the University of Texas at El Paso.

Ronald M. Stevens has served as our Chief Financial Officer, Executive Vice President and Treasurer since October 2000. From August 1999 to September 2000, Mr. Stevens served as Chief Financial Officer and then President and Chief Operating Officer of OnHealth Network Inc., a consumer healthcare Internet company, which was acquired by WebMD Corporation in September 2000. From May 1996 to August 1999, he served as General Manager and Senior Vice President of Sierra On-Line, Inc., an interactive software publisher. From May 1994 to May 1996, he served as Corporate and Divisional Controller of Sierra On-Line. Mr. Stevens received his B.A. in accounting and business administration from Western Washington University.

David M. Williamson serves as our Executive Vice President of Business Affairs, General Counsel and Secretary. He joined Primus in November 2000. From April 1998 to October 2000 he was Senior Vice President of Business Affairs at Sierra On-line, Inc., an interactive software company. Prior to April 1998, he was a partner in the Business Technology Group at the law firm of Perkins Coie LLP. Mr. Williamson receive his B.A. in accounting from the University of Denver and his J.D. from the University of California at Berkeley.

Risks Associated with Our Business and Future Operating Results

Our future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future, and an investment in our common stock is subject to a variety of risks, including but

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not limited to the specific risks identified below. The risks described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may impair our business operations. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report and our other public filings. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected and the trading price of our common stock could decline.

We have a history of losses and may not be profitable in the future and may not be able to generate sufficient revenue or funding to continue as a going concern.

Since we began operations, our revenue has not been sufficient to support our operations, and we have incurred operating losses in every quarter. As of December 31, 2002, our accumulated deficit was approximately $100 million. Our history of losses may cause some of our potential customers to question our viability and hamper our ability to sell some of our products. Our revenue has been affected by the increasingly uncertain economic conditions both generally and in our market. Although we have restructured our operations to reduce operating expenses, we will need to significantly increase our revenue and/or further reduce our operating expenses to achieve profitability and positive cash flows from operations, and our revenue may decline, or fail to grow, in future periods. Our expectations as to when we can achieve positive cash flows from operations, and as to our future cash balances, are subject to a number of assumptions, including assumptions regarding improvements in general economic conditions and customer purchasing and payment patterns, many of which are beyond our control. In addition we may require additional financing, which might not be available on acceptable terms, if at all.

As a result of uncertainties in our business and the general economic slowdown, we have experienced and may continue to experience difficulties in collecting outstanding receivables from our customers and attracting new customers. As a result, we may continue to experience losses, even if sales of our products and services grow.

Quarterly fluctuations in our operating results may adversely affect our stock price.

Fluctuations in our operating results, particularly compared to the expectations of investors or market analysts, could cause severe volatility in the price of our common stock. Our revenue and operating results have fluctuated substantially from quarter to quarter and are likely to continue to do so in the future. Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter particularly because of the length of our sales cycle and delays in customer buying decisions. We believe that period-to-period comparisons of our operating results may not be meaningful and you should not rely on these comparisons as an indication of our future performance. We will continue to base our decisions regarding operating expenses on anticipated revenue trends. Therefore, to the extent our actual revenue falls short of our expectations, our operating results will suffer and our stock price will likely decline. If quarterly revenue or operating results fall below the expectations of investors or market analysts, the price of our common stock could decline substantially. Factors that might cause quarterly fluctuations in our operating results include the factors described under the subheadings of this “Risks Associated with Primus’ Business and Future Operating Results” section as well as:

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Due to the slowdown in the national and global economy and geopolitical uncertainties, we believe that many existing and potential customers are reducing or reassessing their planned technology and Web-related investments and deferring purchasing decisions. As a result, there is increased uncertainty with respect to our expected revenue, and further delays or reductions in business spending for information technology could have a material adverse effect on our revenue, operating results and stock price.

Our expenses are generally fixed and we will not be able to reduce these expenses quickly if we fail to meet our revenue forecasts.

Most of our expenses, such as employee compensation and rent, are relatively fixed in the short term. Moreover, our budget is based, in part, on our expectations regarding future revenue levels. As a result, if total revenue for a particular quarter is below expectations, we could not proportionately reduce operating expenses for that quarter. Accordingly, such a revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.

Our continued Nasdaq Small Cap Market listing is not assured, which would make the trading market for our stock more illiquid and could make it more difficult to raise capital.

As of August 2, 2002 our common stock had traded under a minimum $1.00 for the previous 30 trading days. As a result our common stock is out of compliance with the minimum bid price listing requirements for Nasdaq National Market. On October 29, 2002, we announced that the Nas